Education, Expectations and Evaluating the Evidence.

 

More and more people are locking in their mortgage with a fixed rate. 

Are they right?

 
 
When I sold investments managing risk was the name of the game.  Keeping expectations in line with the potential fluctuations of the product they really wanted was paramount.   Now as a Calgary Mortgage broker, I am faced with offering some of the lowest mortgage rates in history and the question I often hear is "Should I lock in this low mortgage rate or go variable? "

The last stat I have read stated that 79% of all mortgages are going into fixed products.  I have found myself explaining that rates are very low right now, but on average if you keep it variable you save more in the long run. Most of my clients have weighing the pros and cons prefer the risk adverse method.  Knowing their payment is going to be the same for a period of time.  Then you have to ask would a slow gradual increase in payment be better or a big increase when you go to renew, if the rates are higher at that time?

Essentially with a fixed rate you are buying insurance that the rates wont go up with a fixed term. The issue is that expectations of what the rates are going to do is already placed within that rate.  The bank is already making their spread on their economic forecast and based upon the bond rates.

What would change fast with higher interest rates?   Less people increasing their payments, less people being able to afford the payments come renewal, less people increasing their payment frequency. The better leading ratios would be  income and salaries to the cost of homes within a city or province.

You then have to ask yourself what you think the rates are going to do.  One common viewpoint is that the "economy" of America was doing better as measured by the record profits of the corporations.  This economy was less to do with employment and inflation, but with where mindset is of these big companies.  Because they were doing better, and less risk adverse they were going to leave the bond markets where they were trying to hedge against losses and enter the equity market.  In conclusion of this viewpoint if money is leaving the bond markets, bond markets would have to increase their rates, to attract investors and if this happens then the spread would be thinner, therefor the lowest mortgage rates in history would be no more. 

As a Calgary mortgage Broker, its all about education, expectations, and evaluating the evidence.